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Market Analysis: Apr 14, 2006

posted on April 14, 2006

The markets were open just four days this week in observance of Good Friday. For the week, nearby wheat futures were up more than 6 cents while the May corn contract lost nearly 7 cents. Bean prices rallied this week, prompting some to wonder if prices have hit the bottom. For the week, May beans gained more than 5 cents per bushel, while the May meal contract advanced by $2.30 per ton. In the fiber market, May cotton gave back last week's gains... and then some... losing 1.96. In livestock, the April live cattle contract gained 65 cents. Nearby feeders were up 17 cents. And the April lean hog contract gained 15 cents. In the financials, Comex gold climbed another $8.10 per ounce. Nearby crude oil prices were up $1.93 per barrel. The Euro lost 51 basis points against the dollar. And the CRB Index gained 3 points to close at 340-even. Here now to lend us her insight on these and other trends is one of our regular market analysts Sue Martin. Sue, welcome back.
Market Analysis: Apr 14, 2006 Pearson: Here now to lend us her insight and these and other trends, one of our regular market analysts, Sue Martin. Sue, good to have you back with us this week.

Martin: Thank you.

Pearson: Let's talk a little bit about -- I want to talk about the wheat market first since there has been such bullish sentiment in the beef market. And, again, not ideal conditions are still impacting wheat production.

Martin: Well, that's exactly right. The hot and dry weather that came back in after we had those nice rains that went through and caused some flooding in Texas and parts of Oklahoma, well they didn't give all the moisture that we really needed to abate the whole drought and now we've come back with hot, dry temperatures, you know, temperatures that are running up around 90 degrees and with the winds that's very, very dry in an area that is already dry. And you've got the wheat that is starting to go head out and it's causing some concerns by the producers and by the trade.

Now, the one state that we're watching is Kansas because there is some hope for Kansas, but if we come back in here this next week we view that any weather forecast that continues to call for hot and dry is probably going to take this market and send it back higher. Our third count on the wheat versus the KC wheat, the July, is $4.96. And then, of course, we do have some resistance around $5.14. So, we think that the wheat has got a good chance of getting there. It's been as high as $4.72. Should the producer sell any? Well, yes, I think you do take advantage of this but this seems like a year to me where we're more seasonal and we make the high in probably the month of May.

Pearson: Okay, so then start seeing the pressure come as harvest hits. We have small acreage numbers in wheat. I mean, wheat kind of can set itself up to be a bullish scenario here.

Martin: Well, one thing I am hearing some talk about is that in North Dakota that we're starting to hear some talk by farmers that because of the wheat prices they may switch their attitude away from planting beans and going to wheat. Of course, wheat prices would enhance that.

Pearson: That's right, that spring market. Well, let's talk a little bit about the corn market which has been extremely interesting the last couple of weeks, since the acreage report came out and the huge shift, huge. Five percent of acreage is a massive shift. Now, we're still early, a lot of things can happen until we actually decide what it is we're going to plant for sure. But that USDA acreage number came as quite a shock to the market. We backed off a little bit this week. What is your thinking Sue? Where are we in this corn market? Where are we headed?

Martin: Well, I think the corn market, you know, the attitude, you know, we hit a high here this week, we made new highs for the year as opposed to last year which we were expecting to happen. I think almost everybody is on that boat right now. But in the same token I think that this good weather is giving the attitude to the trader that hey, you know, farmers get in the field, they love to plant corn and the weather is going to be very nice through the Easter weekend and then, of course, the eight day to ten day forecast calls for more dry weather, and so, at the time that we close the week out. So, I think that they're thinking that we're going to put more corn acres in once the farmer gets in the field. And there is talk by seed dealers that they're noticing more farmers switching at the present time. You know, how much it'll be, hard to say. Informa this last week came out with their estimate over 700,000 to 800,000 acreage switch. That may happen. I've heard some around 500,000 to 600,000 on estimates. I've heard some closer to a million. I think before it's all said and done, though, we will see some acreage switch but it probably won't be a major, major considering the amount of acres towards soybeans that the USDA threw at us on March 31st.

However, any decline is a positive thing towards soybeans. And, of course, any decline in acres take you right back to the old swing factor of the yields for corn and soybeans. This is a year where we have to produce corn. We've got more ethanol usage than what the USDA was expecting. And on top of it you've got all of your competitors in the world, you know, South Africa, almost not quite half but a good percentage decline in their production, China basically they did export some corn in the month of March but not a major amount and they're pretty close to where the USDA had them targeted for five million metric tons, I think they may be around 3.7 at this time on exports.

And then you've got Argentina, their crop went from a 19.9 down to 14.4. You know, our competitors have gone backwards this year and we're the country that has to produce corn, the burden is on us and we now need to have good weather to accommodate at least what acres we do get planted to produce. We think it's a year where you come in with below trend line yields. Trend line is 146 BPA, last year I think the national average was around 161 which was just phenomenal. But I don't expect that kind of a year this year and with any type of weather expect this market to head higher, test the $3 level. $2.88 is our minimum target for December corn and of course once we hit $2.88 we're going to recommend you get some cash sales started. But we also say save some because we think prices probably have a good chance this year of going over three.

Pearson: Sue, I get a lot of questions for analysts and one of them that I hear a lot is, look at '07, look at those far deferred corn contracts, there's big premiums out there. That looks pretty tempting to people.

Martin: Absolutely it does and even if you go to '08, July corn in 2008 has been up around $2.97.

Pearson: Right.

Martin: So, you know, you could probably sell some there and expect that you probably can get a chance back towards $2.50, $2.40, $2.50, not much more than that. But the unfortunate thing will be if you get caught in a weather market this year those things are going to crank for a while. So, but they're holding pace. But yeah, they're not bad sales as far as that goes, those are good prices and over the history would at least let you trade them back to $2.50.

Pearson: Okay, alright. Let's talk about the soybean market. And there is the $64,000 question again with soybeans primarily because we have these two markets. We have our own U.S. market that we watch and then this time of the year we watch South America very closely. Now, you said you didn't think the South American crop was going to be as big as it was promoted to be. That's turning out to be the case. Is it significant enough to give us a run in soybeans?

Martin: Well, I think the thing we have to look at is, yes it is a record. We have to understand that. But it's a disappointing record. You know, they started off saying there was going to be 60 and then it dropped to 58.5 and then the USDA dropped to 57. You know, so, you know, they are coming down but the rest of the industry of analysts out of South America are all talking around maybe 55, 55.5, 54.5, whatever it ends up being it's a disappointment. In the meantime, while they were looking for a big crop out of South America on top of our big yields from last year, they were thinking, the rest of the world was gearing up to use that crop. And so I think that the demand is there and we're down sizing that South American crop. In the meantime, sales have slowed up, they blew our aggressive sellers, about 57% of that crop is sold. So, they were more aggressive this year because they were looking at our big crop and fearing that if the dollar went south they would lose money. So, they've slowed up their sales because the dollar continues to slip. I look for that dollar to slip some more and that is going to create demand to still come at us for the soybeans.

Demand meal is still pretty good even in light of the Avian bird flu, our U.S. demand for soy meal is not as bad as a lot of people want to taught it to be and we're crushing fairly aggressively. As we crush we're losing some beans because of the fact that their protein content wasn't as good in last year's beans while the oil content was fabulous. So, I think that the bean crop has a chance here contrary to what a lot of people say. I look at this bean market, if you look at a chart, a long-term chart, you have gone virtually sideways for almost six months. That is usually a friendly sign to the market long-term. You get a further break in the dollar and, of course, beans are already trading under five dollars in the cash market in the world, that's cheap and when an inflationary environment that we have going I am very reluctant to be very aggressive on the short side at this time.

I had talked about the last time I was on the show that we would probably decline into the first week of April and then I was looking for a low and I still am. I believe we have put a low in this market. If not, it isn't going to be taken out by very much. This market is putting in a huge base and that huge base, if you start to bring July beans back over $5.95, and I'm giving it some room there, but let's even say $6, $5.95, your market is already on a roll and it's breaking out.

Pearson: Okay, so producer wise you're just sitting tight?

Martin: Exactly. Now, as a producer if you really want to sell some cash beans, because a lot of these producers are really buying into all this story because of the heavy stocks, well that's fine but remember next year's story for soybeans is already starting to be written and therefore, that's not a bearish story, it's a very bullish story. So, I think that we have to keep that in mind. Any little hint of a weather issue this year and that bean market is going to turn around on you because you've already thrown every bearish thing you can throw at this market. It's all in the markets, bean price stand, otherwise that market would have fell on its face and been in the lower five's by now and it's not, it's dragging, it's like pushing water up hill to go down. And I think that is a positive sign. That huge base, I can't emphasize it enough, the dollar declining, the price of gold and silver, beans are cheap.

Pearson: Sue, let's talk quickly, cotton market back down this week and China is just the big factor there, it continues to be, correct?

Martin: Well, yes it is, as they are in most everything. You know, I mean, even copper prices, Mark, are almost triple the price they used to be in the near 300. So, but yeah, China continues to be big buyers of a lot of commodities and cotton is one of them. I look at cotton and I'm starting to think cotton needs to be bought. I think that we're getting ready to make a move in cotton as well and it looks to me like you could take cotton back up on the July contract, probably over 60 cents, maybe up towards 63.

Pearson: Alright, let's talk livestock. You've been such a bear on cattle, you have been since the end of 2005, even before then. Boy have we hit a snag here in this fed cattle market. Futures were up just a little bit this week. Again, you mentioned Avian flu, a lot of poultry product out there, a lot of competition. What's ahead for the cattlemen out there?

Martin: Well, let's hope that it takes a while before we see Avian flu in the U.S. because once it hits here our exports of poultry, what we have for exports, will dry up and we can't afford that. The beef market is the highest priced meat market that we have and unfortunately when you look at the cattle, you've got to look at hogs and see what they're doing for pork prices and then you look at how cheap poultry is and if we have a problem with the flu then that is going to get cheaper, that is just going to weigh back on the cattle market. I think that when I look at this cattle market it came down in price, you've aligned on the trend line with the lows of 2003 BSE issues, of December 2003. That trend line coming up through '04 and '05, you took that trend line out this year but you came back above it real quickly. So, we penetrated it, now we're in a corrective rally, a bounce in the market.

How far do we go? You might get June cattle up around 78, maybe 77.5. Do we take out 80? I don't think so. I think that what rally you get in this market in the near term, in the next few weeks, needs to be sold, I believe. I think it's a hedging opportunity. If a producer says, well, I'm not lacking in a profit then go over and get some puts bought to floor yourself. It might be some of your better insurance that you ever bought.

Pearson: Alright, let's talk about the hog market, again, impacted by this total protein back up that we have right now. What is ahead for -- you talked about an expansion late last year, we sure saw it in January. It's been confirmed by the government reports. So, what is ahead now for pork?

Martin: Well, I think the hog market, you know, it's been down, down, down like all meats and I think that it's starting to stabilize here a little bit and just like cattle I think it's going to try to give us a little bit of a bounce. I don't think it's going to be major but I think it's going to try to bounce a little bit and then I wonder if perhaps the June hogs don't start losing to some of the deferred months like the Julys on out. I look at this hog market as it's just too much meat. But it is a little cheap at the present time.

Pearson: Okay, so maybe some better opportunities down the road.

Martin: I think so.

Pearson: And the livestock world, overall. Sue Martin, thank you so much. That's going to wrap up this edition of Market to Market.

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